Legislature(2003 - 2004)

06/23/2004 09:10 AM House JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HJR101 - CONST. AM: PERM FUND P.O.M.V.                                                                                        
[Contains mention of HJR 102 and HJR 26.]                                                                                       
Number 1905                                                                                                                     
CHAIR McGUIRE asked the committee  to focus attention on HJR 101.                                                               
She  noted that  the concept  embodied in  HJR 101  was heard  in                                                               
committee during the regular session.                                                                                           
REPRESENTATIVE   OGG  asked   for  clarification   regarding  the                                                               
constitutional language being deleted by HJR 101.                                                                               
Number 1957                                                                                                                     
BOB BARTHOLOMEW,  Chief Operating Officer, Alaska  Permanent Fund                                                               
Corporation (APFC),  Department of  Revenue (DOR), said  that the                                                               
Alaska State Constitution says that  all income received from the                                                               
permanent  fund shall  be deposited  in the  general fund  unless                                                               
otherwise  provided by  law, and  that in  1980, the  legislature                                                               
passed a statute stating that  all income from the permanent fund                                                               
will be  retained in an  earnings account - within  the permanent                                                               
fund  - available  for  appropriation.   In  response to  another                                                               
question, he  said that  the record reflects  that the  intent of                                                               
the constitutional  language was to provide  the legislature with                                                               
the  maximum flexibility  in determining  the appropriate  use of                                                               
the earnings.                                                                                                                   
REPRESENTATIVE OGG  asked whether  it would be  fair to  say that                                                               
the change  proposed via  HJR 101  would limit  the legislature's                                                               
ability to utilize the earnings of the permanent fund.                                                                          
MR. BARTHOLOMEW offered  that the proposed change  will limit the                                                               
amount of money that can be  appropriated each year, not how that                                                               
money can  be utilized.   He said that  the board of  trustees of                                                               
the  Alaska Permanent  Fund  Corporation  (APFC) recommends  this                                                               
change because the permanent fund  is invested for the long term,                                                               
with one  goal being  to protect the  principal and  another goal                                                               
being to  generate earnings  for use by  the legislature.   These                                                               
goals will be  more easily met if  it is known how  much money is                                                               
going to be used  every year.  In addition, one  way to protect a                                                               
large pool  of money is to  protect it against inflation  and, to                                                               
that   end,  the   board  recommends   constitutionally  limiting                                                               
appropriations  from the  earnings  of the  permanent  fund to  a                                                               
sustainable  yield  so as  not  to  erode the  pool's  purchasing                                                               
MR. BARTHOLOMEW mentioned that if  the formula proposed were used                                                               
currently,  $1.3  billion  would   be  available  each  year  for                                                               
appropriation.   He relayed the  board's belief that  the current                                                               
rules, which  were written 25  years ago,  may no longer  work in                                                               
today's volatile,  capital-market world.  The  change proposed by                                                               
HJR 101  will allow both the  legislature and the public  to know                                                               
what to expect from the permanent fund.                                                                                         
REPRESENTATIVE  OGG asked  how much  money the  legislature could                                                               
appropriate under the current constitutional language.                                                                          
MR. BARTHOLOMEW  estimated that if  using realized income  in the                                                               
calculation, it  would be  close to  $2 billion  before permanent                                                               
fund dividends (PFDs)  are paid, and close to  $1.4 billion after                                                               
PFDs  are  paid.    He  pointed  out,  however,  that  if  income                                                               
currently unrealized  becomes realized, the amount  would change.                                                               
He added  that it is  the professional investment  managers hired                                                               
by  the board  who determine  when income  becomes realized,  and                                                               
this produces  some volatility with  regard to the  amount that's                                                               
available  for  appropriations.    He  opined  that  the  changes                                                               
proposed via HJR 101 would eliminate that volatility.                                                                           
MR.  BARTHOLOMEW  suggested that  by  getting  caught up  in  the                                                               
debate over  how appropriated  funds are to  be used,  people are                                                               
losing sight of  the fact that there are some  things that can be                                                               
done  to help  protect the  permanent  fund for  the future  when                                                               
markets  go down  or become  volatile.   He  reiterated that  the                                                               
board of trustees  is seeking to protect the  permanent fund and,                                                               
to that end, is recommending the changes proposed in HJR 101.                                                                   
CHAIR McGUIRE  remarked that the  proposal is a  sound management                                                               
approach,  and  surmised that  people  are  finally beginning  to                                                               
realize that.                                                                                                                   
Number 2301                                                                                                                     
MR.  BARTHOLOMEW,   in  response  to  a   question,  relayed  his                                                               
understanding that  there is an  attorney general's  opinion that                                                               
says the  legislature may only  appropriate the  permanent fund's                                                               
realized income.                                                                                                                
REPRESENTATIVE SAMUELS asked how HJR 101 differs from HJR 26.                                                                   
MR.   BARTHOLOMEW  offered   his  understanding   that  the   two                                                               
resolutions are  very similar  and contain  the same  concept and                                                               
objectives.   In response to  another question, he said  that all                                                               
earnings are reinvested immediately  and so "income" is available                                                               
on paper;  in other  words the act  of reinvesting  earnings does                                                               
not [preclude them from being considered realized income].                                                                      
TAPE 04-87, SIDE B                                                                                                            
Number 2373                                                                                                                     
REPRESENTATIVE GRUENBERG said his  concern is that the investment                                                               
managers might choose to sell assets  in order to make more funds                                                               
available for appropriation.                                                                                                    
MR.  BARTHOLOMEW said  that  concern  is one  reason  to adopt  a                                                               
percent-of-market  approach; the  buying  and  selling of  assets                                                               
under a  percentage of market  value (POMV) proposal  is separate                                                               
and has no affect on  what's available for distribution.  Another                                                               
option would be for the legislature  to set an amount it wants as                                                               
a spending limit  on the permanent fund and  then adjust statutes                                                               
accordingly.   In  response to  a  question, he  relayed that  in                                                               
1996, when  there was a  large accumulation of  unrealized gains,                                                               
the  board  of trustees  went  through  an eight-  or  nine-month                                                               
deliberative process in  order to determine whether  to realize a                                                               
portion of those gains and include it in the dividend formula.                                                                  
CHAIR McGUIRE  mentioned that there  is a concern that  the board                                                               
of  trustees  could  be  making  management  decisions  based  on                                                               
political agendas.                                                                                                              
Number 2209                                                                                                                     
WILLIAM  A. CORBUS,  Commissioner, Department  of Revenue  (DOR),                                                               
noted  that recently  passed  legislation  prevents the  governor                                                               
from removing board of trustee members except for cause.                                                                        
REPRESENTATIVE   GARA  mentioned   that  Legislative   Legal  and                                                               
Research  Services is  drafting  an amendment  for  him which  he                                                               
hopes to offer as a compromise  solution that all members and the                                                               
community can accept.  He went on to say:                                                                                       
     There is debate ... among all  of us on how much should                                                                    
     go  into  a  dividend:    some  of  us  want  a  bigger                                                                    
     dividend, some of  us want a smaller  dividend, some of                                                                    
     us want it in the  [Alaska State] Constitution, some of                                                                    
     us don't, some of us want  a public vote.  I don't know                                                                    
     where that's  going to go.   We might come out  of this                                                                    
     special  session, if  we just  focus  on the  proposals                                                                    
     that have been made so far,  with nothing.  The ... two                                                                    
     places  where  there seems  to  be  consensus is,  some                                                                    
     version of  POMV for managing the  permanent fund seems                                                                    
     appropriate, with maybe some  tweaks here or there, ...                                                                    
     [so] maybe  we stick  a clean POMV  on the  ballot ...;                                                                    
     the  other  part that  there  is  growing consensus  on                                                                    
     across party  lines ...  is that  we need  to reinstate                                                                    
     some sort of municipal  revenue sharing through maybe a                                                                    
     community dividend, and so the  governor has proposed -                                                                    
     and many  of the rest of  us have proposed -  a portion                                                                    
     of  the  POMV  proceeds  to be  used  for  a  community                                                                    
     dividend, whether it's 5 percent,  10 percent, [or] 7.5                                                                    
     percent. ...                                                                                                               
     I would  like everybody to  think about this:   a clean                                                                    
     POMV proposal  on the ballot, plus  the 5 or 7.5  or 10                                                                    
     percent for a community dividend.   [Those are] ... the                                                                    
     parts that I  think we can all agree on.   Maybe [there                                                                    
     could be] a separate advisory  vote or separate bill on                                                                    
     the dividend  amount -  my preference  is [to  use] the                                                                    
     current  dividend formula,  but  leave  that ...  whole                                                                    
     dividend thing to the side.   I want people to consider                                                                    
     a proposal that would address  the parts I think we can                                                                    
     come  out   of  here   with  some  consensus   on.  ...                                                                    
     [Commissioner] Corbus,  do you have any  thoughts about                                                                    
     whether  or   not  the  administration   might  support                                                                    
     something  like that  if we  can't  forge consensus  on                                                                    
     something bigger?                                                                                                          
COMMISSIONER  CORBUS replied:   "I  think  so; I  think that  ...                                                               
there are  two proposals on the  table:  pure POMV,  and then the                                                               
enshrinement of  the dividend - and  45 percent of the  payout to                                                               
education, 5  percent to the  municipal revenue sharing."   We're                                                               
just looking for a solution," he added.                                                                                         
Number 2094                                                                                                                     
REPRESENTATIVE  GARA asked  whether the  administration would  be                                                               
amenable to just  a clean POMV and include in  it a provision for                                                               
a community dividend.                                                                                                           
COMMISSIONER CORBUS  replied:  "The  administration has  made two                                                               
proposals; if [the]  legislature has a counter  proposal to make,                                                               
we certainly would consider it."                                                                                                
REPRESENTATIVE GARA  said he might  support the POMV  proposal as                                                               
written, but he  does have a couple of reservations,  one of them                                                               
being that the market could take  a downturn for a long period of                                                               
time,  for example,  20 years.   He  asked whether  the APFC  has                                                               
considered adding to the POMV  proposal a provision that says the                                                               
legislature may not dip into the  principal at all or may not dip                                                               
into the principal  by more than 1  or 2 percent.   He asked what                                                               
amount  the POMV  formula  would yield  during  a 20-year  market                                                               
MR. BARTHOLOMEW said  that the board has considered  the issue of                                                               
what  happens  in  prolonged  down  markets  under  a  5  percent                                                               
spending limit,  and that is  why the  board has agreed  to adopt                                                               
statutory "guardrails"  which would provide, in  a prolonged down                                                               
market, a mechanism  by which to trend down payouts  to keep pace                                                               
with  the market.    The  concept of  leaving  the protection  of                                                               
principal in  the Alaska State Constitution  has been complicated                                                               
by  well-meaning   actions  over  the   last  15  years   of  the                                                               
legislature.   If the permanent  fund had been left  alone, where                                                               
all the earnings  that hadn't been spent had  been accumulated in                                                               
an earnings account,  there would be $7 billion  in there; that's                                                               
how  much  the  permanent  fund  has  earned  in  excess  of  the                                                               
protection of inflation.                                                                                                        
MR.  BARTHOLOMEW explained  that if  that amount  had been  in an                                                               
earnings account, he  suspected that there wouldn't  be any worry                                                               
about near-term  down markets because  there would be  a cushion.                                                               
However, the legislature swept those  reserves into principal and                                                               
they are  now locked  up; this has  created a  near-term problem,                                                               
but  only for  the next  2-4 years,  wherein there  is a  risk of                                                               
going to a reduced or a zero  payout.  For this reason, the board                                                               
is  suggesting a  guardrail/safeguard  to protect  the fund  such                                                               
that  the payout  won't be  taken to  zero or  be at  risk.   And                                                               
although  the risk  is small,  if Alaska's  economy depends  on a                                                               
dividend  or a  dividend is  used  for public  services, then  if                                                               
things  go  wrong at  the  wrong  time,  it  could result  in  an                                                               
economic crises.                                                                                                                
MR. BARTHOLOMEW relayed  that one of the debates  that took place                                                               
in  the House  Finance Committee  was whether  the aforementioned                                                               
guardrails  should  be   in  statute  or  in   the  Alaska  State                                                               
Constitution,  and that  committee  decided that  the best  place                                                               
would be in statute.                                                                                                            
Number 1883                                                                                                                     
REPRESENTATIVE  GARA asked  what  the  majority of  institutional                                                               
funds use as their POMV percentage.                                                                                             
MR.   BARTHOLOMEW  said   that   approximately   80  percent   of                                                               
institutional funds use between 4  and 5.5 percent.  He indicated                                                               
that those  funds that  used higher  percentages during  the bull                                                               
market  are now  in trouble.   He  explained that  the 5  percent                                                               
figure  chosen by  the board  and director  is more  conservative                                                               
than  it might  first appear  because the  permanent fund  uses a                                                               
five-year  average; this  neutralizes the  volatility of  both up                                                               
and down markets,  and results in about a  4.6- or 4.7-percentage                                                               
rate  of payout.   He  also  noted that  most funds  pay out  the                                                               
expenses of managing the fund  before calculating the payout; the                                                               
legislature, on  the other hand,  calculates those costs  as part                                                               
of the permanent fund's payout  percentage.  Thus, he opined, the                                                               
proposal  of  a  POMV  set   at  5  percent  is  very  practical,                                                               
reasonable, and appropriate.                                                                                                    
REPRESENTATIVE OGG offered his understanding  that under HJR 101,                                                               
there  is no  mandate to  spend  5 percent;  the legislature,  in                                                               
fact, could choose to spend a much smaller percentage.                                                                          
MR. BARTHOLOMEW concurred.                                                                                                      
REPRESENTATIVE  GRUENBERG opined  that  the  proposal before  the                                                               
committee would  allow investment mistakes or  investment actions                                                               
based on  political agendas to  be covered up, thus  reducing the                                                               
public accountability of the fund's managers.                                                                                   
COMMISSIONER CORBUS  said he  does not see  the proposal  in that                                                               
MR. BARTHOLOMEW  offered his  belief that  both currently  and in                                                               
the  past, the  permanent  fund  has been  managed  with as  much                                                               
disclosure and transparency as possible.   How the permanent fund                                                               
is  invested  is dictated  by  statute  and the  transparency  of                                                               
monthly reports  ensures that  any inappropriate  investments are                                                               
readily  visible.     Under  the   proposal,  as   an  additional                                                               
safeguard,  it  would  still  up to  the  legislature  to  decide                                                               
whether to dip into principal.   He offered his belief that there                                                               
are  several   safeguards  in  place   addressing  Representative                                                               
Gruenberg's concerns.                                                                                                           
REPRESENTATIVE SAMUELS offered his  opinion that the state should                                                               
follow the example  set by the majority of other  funds and adopt                                                               
a POMV proposal.                                                                                                                
Number 1550                                                                                                                     
REPRESENTATIVE GARA  made a motion to  adopt Conceptual Amendment                                                               
1,  "to add  into  HJR 101  also the  community  dividend at  7.5                                                               
percent, and then  leave the rest of the POMV  proceeds up to the                                                               
legislature to allocate among dividends and other services."                                                                    
Number 1533                                                                                                                     
REPRESENTATIVE  SAMUELS objected.   He  opined that  it would  be                                                               
more appropriate  to have a  clean POMV  resolution - such  as is                                                               
proposed  via  HJR 101  -  and  then  perhaps  alter HJR  102  by                                                               
stripping  out the  PFD  and education  funding  provisions.   He                                                               
noted  that the  concept embodied  in HJR  102 has  not yet  been                                                               
debated in the House Judiciary Standing Committee.                                                                              
REPRESENTATIVE  GARA  said  he  would like  to  see  a  municipal                                                               
revenue sharing  provision in HJR 101  because if HJR 102  is not                                                               
adopted by  the legislature, the community  dividend provision in                                                               
it will  not go  before the  voters.  By  placing all  the things                                                               
that members  can agree  on in  HJR 101, it  won't matter  if HJR
102, which  contains provisions that members  aren't yet agreeing                                                               
on, fails.   He suggested that  it will ultimately be  cleaner to                                                               
put the municipal  revenue sharing provision in HJR  101 and then                                                               
pass both  it and the POMV  proposal.  He then  calculated that a                                                               
7.5 percent  municipal revenue sharing  dividend would  put about                                                               
$90  million   into  the   municipal  revenue   sharing  program,                                                               
approximately equaling what it was  10 years ago, and offered his                                                               
belief that  Governor Walter J.  Hickel once said that  there are                                                               
approximately  40  communities   relying  either  exclusively  or                                                               
almost  exclusively  on  municipal  revenue  sharing  until  that                                                               
provision was vetoed by the [current] governor last year.                                                                       
REPRESENTATIVE GARA  mentioned that  even Anchorage has  felt the                                                               
absence of municipal revenue sharing  via an increase in property                                                               
taxes.  By instituting a  municipal dividend, Anchorage could get                                                               
some relief from  property taxes as well as enjoy  an increase in                                                               
education funding.  He went on to say:                                                                                          
     With  the  understanding  that [Legislative  Legal  and                                                                    
     Research  Services] ...  is  drafting  the 7.5  percent                                                                    
     community  dividend provision  for [HJR]  101, I  would                                                                    
     still move the conceptual amendment  of POMV plus a 7.5                                                                    
     percent  community  dividend.   In  effect,  unless  we                                                                    
     change the permanent fund  dividend formula, that would                                                                    
     leave  the  ...  the   excess  earnings  available  for                                                                    
     expenditure on ...  whatever the legislature determined                                                                    
     it should be spent on.   But just address the community                                                                    
     dividend here.                                                                                                             
Number 1398                                                                                                                     
REPRESENTATIVE HOLM offered  his belief that in  his borough, the                                                               
community  dividend  has  been  eaten   up  100  percent  by  the                                                               
Teachers'   Retirement  System   (TRS)   and  Public   Employees'                                                               
Retirement System (PERS) problem,  and remarked that this problem                                                               
has  yet to  be addressed.   He  characterized adopting  the POMV                                                               
approach such  that the state won't  be able to pay  for the PERS                                                               
and TRS problem as "hedging our  bet."  He remarked that although                                                               
he doesn't have a problem with  the POMV approach, he does have a                                                               
problem with  not being  able to  fund that  which the  state has                                                               
already contracted to fund, and  suggested that for some areas of                                                               
the state any  funds they receive from a  municipal dividend will                                                               
go to  pay for the  PERS and TRS  shortage rather than  for other                                                               
needed services.                                                                                                                
REPRESENTATIVE OGG recalled  that the House did pass  out a clean                                                               
POMV resolution, and suggested that they  should do so again.  He                                                               
characterized  Conceptual  Amendment  1   as  cluttering  up  the                                                               
current proposal, said  he is not willing to pass  on such to the                                                               
other body, and suggested altering HJR 102 instead.                                                                             
CHAIR  McGUIRE said  she admires  Representative Gara  for coming                                                               
forward  with  proposed  amendments  as  an  attempt  at  finding                                                               
consensus,  adding that  she agrees  with his  summation of  what                                                               
members have consensus on.                                                                                                      
REPRESENTATIVE GARA offered his belief  that a POMV proposal with                                                               
a  community  dividend   provision  will  address  Representative                                                               
Holm's concern regarding funding the  PERS and TRS shortages, and                                                               
still  leave money  for  other needed  municipal  services.   The                                                               
proposed  changes to  the constitution  will  not preclude  other                                                               
items from being funded via statutory provisions.                                                                               
Number 1103                                                                                                                     
REPRESENTATIVE GARA  withdrew Conceptual Amendment 1,  and made a                                                               
motion to adopt in its stead  as Amendment 1 an amendment labeled                                                               
23-GH2168\A.1, Cook, 6/23/04, which read:                                                                                       
     Page 1, line 1:                                                                                                            
          Delete "and limiting"                                                                                               
     Page 1, line 2, following "fund":                                                                                        
          Insert "and limiting those appropriations"                                                                          
     Page 1, line 15:                                                                                                           
          Delete "a new subsection"                                                                                             
          Insert "new subsections"                                                                                              
     Page 2, following line 3:                                                                                                  
          Insert a new subsection to read:                                                                                      
          "(c)  Each fiscal year at least seven and one-                                                                        
         half percent of the total amount available for                                                                         
        appropriation under (b) of this section shall be                                                                        
     appropriated as  State aid to municipalities  and other                                                                    
     communities.   The balance  remaining available  may be                                                                    
     appropriated  for other  public  purposes, including  a                                                                    
     program  of  dividend  payments for  residents  of  the                                                                    
     State established by law."                                                                                                 
Number 1101                                                                                                                     
REPRESENTATIVE ANDERSON objected.                                                                                               
REPRESENTATIVE OGG expressed  a concern that such  a change could                                                               
result  in  the legislature  being  forced  to fund  a  municipal                                                               
dividend at the expense of education funding.                                                                                   
CHAIR McGUIRE  remarked that  such is  a concern  with enshrining                                                               
the  permanent fund  in  any  fashion, that  it  could result  in                                                               
something  being  funded at  the  expense  of some  other  needed                                                               
Number 0992                                                                                                                     
A roll  call vote  was taken.   Representatives Gara  and McGuire                                                               
voted in favor  of Amendment 1.   Representatives Ogg, Gruenberg,                                                               
Samuels,  Holm,  and  Anderson  voted  against  it.    Therefore,                                                               
Amendment 1 failed by a vote of 2-5.                                                                                            
Number 0988                                                                                                                     
REPRESENTATIVE SAMUELS moved  to report HJR 101  out of committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes.  There  being no objection, HJR 101 was  reported from the                                                               
House Judiciary Standing Committee.                                                                                             

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